Denmark’s Krone Defense Drives Benchmark Lending Rate Lower

Danish policy makers have resorted to unprecedented easing to prevent the krone strengthening beyond the limits of its peg. Photographer: Chris Ratcliffe/Bloomberg

May 2 (Bloomberg) -- Denmark’s central bank lowered its
benchmark lending rate following a cut from the European Central
Bank as policy makers in Copenhagen defend the krone’s peg to
the euro.

Nationalbanken lowered the lending rate to 0.2 percent from
0.3 percent, it said in a statement today. The deposit rate was
held at minus 0.1 percent. The decision followed a 0.25
percentage point cut earlier today by the ECB, bringing the euro
area’s main rate to 0.5 percent. Denmark’s central bank doesn’t
hold scheduled meetings and only changes interest rates to
maintain the exchange rate.

“The low monetary policy rates leave a limited leeway for
a reduction of Denmark’s Nationalbank’s lending rate,” the
central bank said in a statement. “In the current situation
where the monetary policy counterparties have a large need to
place funds at Danmark’s Nationalbank, the monetary deposit
rates determine the money market rates and the exchange rate.”

Danish policy makers have resorted to unprecedented easing
to prevent the krone strengthening beyond the limits of its peg.
The nation’s status as a haven from Europe’s crisis -- thanks to
a debt load that’s less than half the euro-zone average -- has
fueled a capital influx into Denmark’s AAA markets and stretched
the central bank’s tool box to its limits.

Krone Moves

The krone traded at 7.4550 per euro as of 4:32 p.m. in
Copenhagen. That compares with yesterday’s close of 7.4561. It
traded as strong as 7.4553 against the euro yesterday, versus
the central bank’s targeted rate of 7.46038. The Danish currency
was as strong as 7.4306 per euro in May last year and as weak as
7.4633 in January. Foreign currency reserves reached a high of
514.4 billion kroner ($91 billion) in August and have since
declined to 491.7 billion kroner in April, the bank said today.

“There was leeway to lower the lending rate all the way to
0.05 percent,” Niels Roenholt, an economist at Jyske Bank A/S
in Silkeborg, Denmark, said by e-mail. “The central bank
prioritized to keep some space to that threshold and will still
have space to move lower if needed.”

Asked by phone why the Danish central bank didn’t match the
size of the ECB’s cut, Director Karsten Biltoft said “there’s a
limit to how low the lending rate can go in the current
situation.” He declined to comment further.

Banking Crisis

While fiscal restraint has kept public debt levels in
check, Denmark has suffered more through the global financial
crisis than neighboring Norway and Sweden. A more-than 20
percent slump in property prices since 2007 triggered a regional
banking crisis that’s wiped out more than 12 banks since 2008.

Denmark’s $300 billion economy probably contracted last
quarter, after shrinking 0.7 percent in the three months through
December, according to Danske Bank A/S and Svenska Handelsbanken
AB. That would mark the nation’s third recession in less than
four years.

Though the central bank’s policy mandate doesn’t give it
scope to steer economic growth, the nation’s haven status has
resulted in record low borrowing costs, helping households make
debt payments. That’s held a cushion under Denmark’s economy as
the government argues it doesn’t have room to stimulate demand
further.

“With the uncertainties that persist in Europe it would be
unwise to spend more as things can still change for the worse,”
Economy Minister Margrethe Vestager said this week.